Tesla should become an insurer

In its Q4 2016 and full year financial results and Q&A webcast, Tesla’s President of Global Sales and Service, Jonathan McNeill, spoke about Tesla’s future vision of a “one-price” offer that includes car, insurance and maintenance. The comment was made on the basis of their activity in HongKong and Australia, providing insurance through underwriting partners.

It wouldn’t be the first time a car manufacturer offers insurance coverage through a captive or partnership: BMW offer specialised cover with Allianz and Volkswagen through Ageas in the UK. However, Tesla have hinted that they will offer “in-house” insurance if insurers continue to underestimate the safety potential offered by its vehicle’s ADAS features.

This has the signs of a marketing ploy; Tesla has shown before that it is willing to take risks in order to create innovative and differentiating services. One example is the 8 years/infinite mile warranty on the battery pack and drive units. However, as a champion of advanced assistance and automation, Tesla is thinking beyond simply providing insurance as an extra bolt-on purchase incentive.

In our upcoming study on Autonomous Vehicles (AVs), we will examine the impact of AVs on motor insurance coverage. One of the outputs from our research argues that OEMs will be responsible for crashes that occur while in ‘autonomous mode’, if the AV is at fault. How drivers will be protected under this model will certainly differ between countries. In the US, the first states legalising AV sales have requested that OEMs take on limited product liability insurance. In the UK, it is becoming clear that coverage for autonomous failure will be included as a mandatory component of every insurance policy.

As OEMs take responsibility for their vehicles whilst in autonomous mode, we predict that new challenges will be faced by insurers and they could prove costly. Proving fault in a crash involving an autonomous vehicle will require vehicle data that the manufacturer will not publish unless mandated.

Herein lies the business case for Tesla to sell insurance:

On the claims side, the safest car will have less chance to be responsible for an accident. The high price of repairing Tesla cars is therefore more likely to fall on the third party insurer of the at-fault driver.

Fault investigation will be quicker and cheaper provided free access to the data exists. Claims compensation mechanisms can be accelerated by reducing the PR impact of an accident where the AV was at fault.

For the dealer, this is also a critical advantage; captive insurers are always better placed to price effectively. Thanks to Tesla’s ultra-granular data, the dealer will be able to undercut competing insurers that today charge very high premiums based on average repair costs, not safety features.

There are some limitations to this plan however, notably that the Tesla repair network is still very small and repairs are expensive. Also, any margin made on replacement parts will now be transferred onto Tesla’s claims cost. It does mean however, that Tesla will control repair quality, translating in reduced risk and much better customer relations.

Motor insurance has never been an easy money-making scheme. Despite the obvious customer advantages the “one-price” offer will need volumes and low average claims to remain financially profitable. However, with the right underwriting partner and a step-by-step approach to test the loss ratio, the strategy could become yet another example of how the car-as-a-service model is coming, and it is coming fast.

Blog written together with Matthew Cobbold

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